EU goes large on climate, with a 27% super-RET

The EU has signed off on a renewables target that goes beyond just electricity while, crucially, also approving a 40% emissions reduction target which will bolster its ETS.

While Industry Minister Ian Macfarlane seems to believe the existing Renewable Energy Target needs to be cut because it might deliver 27% renewable energy market share, the European Union’s European Council (the heads of state for each nation within the EU) has unanimously signed off on a target for at least 27% renewable energy by 2030.

In addition, this EU target is for 27% share of renewables across its entire energy supply including transport fuels and heat, not just electricity. In terms of electricity market share it will lie closer to 40%.

But the most important aspect of the recent EU decision is that it commits the European Union to at least a 40% cut in carbon emissions from 1990 levels by 2030. Also critical to note is that this target, unlike the 20% reduction by 2020, must be met through cuts to emissions on European soil – it can’t simply rely on buying up cheap emission reduction offsets from poor developing nations.

To achieve the overall 40% target, the sectors covered by the EU emissions trading system will have to reduce their emissions by 43% compared to 2005. This will translate into a cap declining by 2.2% annually from 2021 onwards, instead of the rate of 1.74% up to 2020. Furthermore, the council gave a form of endorsement to the European Commission’s proposal to address the current huge overhang of surplus emission permits via establishing a market stability reserve from 2021 onwards.

Emissions from sectors outside the EU ETS would need to be cut by 30% below the 2005 level. In addition Denmark has gained acceptance for expanding the sectors covered by the ETS in their nation to include transport and possibly agriculture and land use.

European-based environmental groups are complaining this is not enough. They had hoped for a 30% Renewable Energy Target and Energy efficiency target. However resistance from Britain in particular as well as some eastern European states led to backdowns.

The renewable energy target will be binding at an overall EU level, yet it’s not yet clear how this might be achieved such as through a Europe wide renewable energy certificate trading mechanism, or just relying on some nations such as Germany to make up for inadequate efforts by other nations.

Also, the energy efficiency target is voluntary and aspirational. Events in the Ukraine had led to a reinvigoration of enthusiasm for energy efficiency policy efforts in Europe, in order to reduce dependence on Russian gas. However this has not been enough to overcome resistance from key countries such as the UK and some energy industry interests.

Still in spite of environmental group complaints, this is an awful lot better than no 2030 emission reduction target at all and no plan to develop one, which is where Australia finds itself.

There were some concerns that Poland would veto this 40% emission reduction target whose leaders seem almost as much in love with coal as Tony Abbott. But their acceptance and that of other eastern European nations to the deal was eventually bought through generous transfers of emission permits – effectively money.

With this deal now sown up, the United States and China are next off the rank, both having committed to releasing their emission targets in the first quarter of next year.

Meanwhile, the Australian Government is still to announce a formal process for developing its own emission reduction targets for the post 2020 period, in time for the Paris climate treaty negotiations in December next year.

This could all make for a rather interesting G20 meeting in Brisbane. Tony Abbott will have to rebadge emission reduction efforts as ‘energy efficiency, while skirting around building pressure from these other jurisdictions to stop pretending coal can be burnt without dangerous repercussions.

IMPORTANT: This information has been prepared without taking into account your objectives, financial situation or needs and you should consider if the information is appropriate for you before making an investment decision. Unless otherwise specifically stated or disclosed (such as the InvestSMART Diversified Portfolios Product Disclosure Statement), neither InvestSMART Financial Services Pty Ltd nor any of its Related Companies make any recommendations as to the merits of any investment opportunity referred to in its emails or its related websites. Product disclosure statements for financial products offered through InvestSMART can be downloaded from this website or obtained by contacting 1300 880 160. You should consider the product disclosure statement before making a decision about the product. All indications of performance returns are historical and can not be relied upon as an indicator for future performance.